Davos: Income and Wealth Inequality to Top Agenda

Davos – On the eve of its annual flagship meeting in the Swiss Alpine village Davos, the World Economic Forum (WEF) has released a 14-point discussion paper on inclusive growth and the need to shrink the widening income gap. The forum calls on the world’s policymakers to refrain from “vaguely aspirational” talk and tackle growing inequality in more “concrete” ways. The document notes that the international consensus on the need to adopt improved growth and development models has so far largely failed to produce effective policy initiatives.

Over the past few years, the forum has consistently identified income and wealth inequality as a major threat to the global economy. WEF board member and head of the Centre for the Global Agenda Rick Samans yesterday explained the urgent need for an analytical framework to be erected that offers clear policy guidance and evidence-based solutions to decision makers concerned about a more equitable distribution of the fruits of economic progress.

Mr Samans, a former economic advisor to US President Bill Clinton, went on to reveal that the WEF has assembled a set of 14 benchmarks that governments may use to gauge their own performance on promoting inclusive growth. The forum looked at the development models of 96 high, middle, and low income countries to distil a set of benchmarks across six areas: employment and income policies, asset building and investment, basic services, infrastructure, fiscal regimes, and corruption and rents. Taken together the benchmarks form a tool for, as Mr Samans detailed, “the exploitation of available policy space across the full spectrum of levers.”

Deflect Criticism

Notwithstanding this techno-babble, the WEF discussion paper on inequality is a most welcome addition to the forum’s agenda. It is also meant to deflect some of the criticism levelled at the Davos get-together by, amongst others, Oxfam, a confederation of seventeen organisations working in 94 countries to alleviate poverty. Earlier this week, Oxfam published its own report on inequality, concluding that by this time next year the richest 1% of the world population will own more wealth than all of the other 99%. Right now, the one-percenters own approximately 48% of global wealth, up from 44% in 2009.

“As an informal gathering of billionaires, powerbrokers, government leaders, and other assorted authorities, the Davos meeting is the ultimate venue for promoting change.”

As an informal gathering of billionaires, powerbrokers, government leaders, and other assorted authorities, the Davos meeting is the ultimate venue for promoting change. Oxfam International Executive Director Winnie Byanyima is one of six co-chairs of this year’s proceedings and is adamant that the concentration of wealth be reversed: “Rising inequality is dangerous. It’s bad for growth and it’s bad for governance. We see a concentration of wealth capturing power and leaving ordinary people voiceless and their interests uncared for.”

Last year, Oxfam caused considerable furore with a study showing that the 85 richest people of the planet command assets and resources equal to those possessed by the poorest 50% of the world’s inhabitants. This year, the concentration of wealth has increased further with just the 80 wealthiest people owning the same as the poorest 3.5 billion.

According to Oxfam, those 80 exceedingly rich folks doubled their wealth between 2009 and 2014. “Do we really want to live in a world where the 1% own more than the rest of us combined? The scale of global inequality is quite simply staggering and despite the issue shooting up the global agenda, the gap between the richest and the rest is widening fast,” said Mrs Byanyima.

In Davos, Oxfam will urge government leaders to adopt a plan comprised of seven points that, taken together, may promote inclusive development and reduce income and wealth disparities. The organisation suggests clamping down on tax evasion by corporations and ultra-high-net-worth individuals, investing in free and universal education, shifting taxation from labour and consumption to capital and wealth, introducing minimum living wages, bridging the gender pay and opportunity gap, ensuring adequate social safety nets with income guarantees, and agreeing on a global initiative to tackle inequality.

Contradicting French economist Thomas Piketty – who in his bestselling book on wealth disparities argues that inequality is the natural outcome of economic processes – Mrs Byanyima suggests that specific policies lay at the root of this evil: “Extreme inequality is not just an accident or a natural rule of economics. It is the result of policies and with different policies it can be reduced.”

Trickling-Up

Prominently on display in Davos is the abject failure of trickle-down economics to deliver sustained growth. The idea, first introduced as a cure to all societal ills in the 1980s by President Reagan in the US and Prime-Minister Thatcher in the UK, was to cut the taxes levied on the rich in order to unleash their awesome spending power. The largess of the lightly-taxed über-wealthy would boost the overall economy and thus provide increased incomes to all.

It took some time for the libertarians to catch on, but their trickle-down economics contained a fallacy of outsized proportions: instead of spending their untold millions and billions on consumer goods and services, the excessively rich mostly invested their capital in sheltered assets. Others just sluiced their monies to exotic tax havens. After all, how many Mouawad diamond purses ($3.8 million each), Patek Philippe Caliber 89 watches ($5.1 million per timepiece), and Lamborghini Veneno roadsters (a veritable steal at $4.5 million) can anyone enjoy?

Trickle-down windfalls awarded to rich folks and large corporations contributed towards greater fiscal deficits. These, in turn, resulted in states assuming larger debt loads which now need to be paid off, dampening growth prospects and depressing the purchasing power of wages. Some studies show that the misguided assumptions of trickle-down economics have lowered economic growth over the past three decades by as much as 20% in the UK.

In a report published to coincide with the opening of the 45th World Economic Forum meeting in Davos, the Center for American Progress, a US public policy research and advocacy organisation, shows that tax cuts for the rich are merely the upward distribution of income. The report, written by former US Treasury Secretary Larry Summers and the UK Labour Party’s shadow Chancellor of the Exchequer Ed Balls, states that: “Left to their own devices, unfettered markets and trickle-down economics will lead to increasing levels of inequality, stagnating wages, and a hollowing out of decent, middle-income jobs.”

In their study, Messrs Summers and Balls find open doors aplenty. Tax cuts for the wealthy inexorably result in higher savings rates rather than increased spending thus slowing down economies instead of boosting growth. The authors propose higher tax rates on the rich and on large multinational corporations, closing the myriad loopholes that enable them currently to evade taxes without running afoul of legislation. The additional monies thus flowing into national treasuries should, according to Summers and Balls, be employed to improve both public services and infrastructure.

French Experience

While recent experience in France has shown that the reintroduction of ultrahigh marginal tax rates does little to bolster tax receipts, a top rate of 50% should not cause capital flight. “A bit of inequality is good as it creates incentives for hard work and rewards entrepreneurship. Lots of inequality is bad, disenfranchises segments of society, and erodes the social fabric,” says Mohamed El-Erian, the former CEO of PIMCO – the world’s largest bond investment fund.

In yet another report released to impact the Davos WEF meet, the International Labour Organisation (ILO) shows that inequality is also dampening the growth prospects of emerging markets. According to the ILO, periods of accelerated growth are becoming less frequent in these countries which brakes the rise of income levels and thus perpetuates the gap between fully-developed and emerging markets.

Excessive and growing inequality in both income levels and wealth is now firmly established as the headline topic of the meeting in Davos. It is a way for the World Economic Forum to show that it means business when it comes to “improving the state of the world” – the organisation’s slogan of old. Although one wouldn’t think so from observing the gathering of the rich and powerful in a posh Swiss ski resort, the WEF was actually not conceived as a meeting ground for the privileged. It is also not the organiser’s intention to have the one-percenters decide on the fate of the hoi polloi.

The forum is but a meeting place to freely discuss the state of the world and exchange thoughts on how to improve it. By placing inequality at the top of its bill, the forum may yet redeem itself in the eyes of its critics and provide the impetus for lasting change.